Stock Market Investors: Who Is More Rational, and Who Relies on Intuition?

Shlomit Hon-Snir, Andrey Kudryavtsev, Gil Cohen

Abstract

Contemporary research documents various psychological aspects of economic and financial thought and decision-making. The main goal of our study is to analyze the effects of five well-documented behavioral biases, namely, disposition effect, herd behavior, availability heuristic, gambler's fallacy and hot hand fallacy, on the mechanism of stock market decision-making, and, in particular, the individual differences in the degrees of these effects. Employing an extensive online survey, we document that on average, active stock market investors exhibit moderate degrees of behavioral biases. Furthermore, we find that, on the one hand, more experienced investors are less affected by behavioral patterns, yet, on the other hand, professional portfolio managers do not behave, in this respect, differently (more rationally) from non-professional investors. We, therefore, infer that investor's experience in stock market matters, but not the "status" itself of being a professional, may decrease the effect of behavioral biases on her. In addition, we detect that the major "rationalizing" effect of experience is already accumulated in the first years of investors' stock market activity. Finally, we document that female investors are more strongly affected by all the five behavioral biases.

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